As we have previously opined, complying with the requirements of CAS 413’s segment-closing pension adjustment requirements (codified at 48 C.F.R. § 9904.413-50(c)(12) for those interested) is just about the hardest thing to attempt in the world of government contract cost accounting.  Adding to the inherent difficulty is the ambiguity of the requirements:  trying to figure out how to apply the complex and arcane rules to fit individual facts and circumstances is challenging in the best of circumstances, but is made more so when the parties (Government and contractor) disagree on how the calculations should be made.  Protracted litigation is almost always the outcome when CAS 413 is involved.

 

We have also noted that the Court of Federal Claims almost always gets it right, at least when Judge Nancy Firestone is presiding. She has a tendency to cut through the tangled knot of adversarial arguments to reach decisions with the Wisdom of Solomon, in our view.  And once again, another recent Firestone decision helps us to better understand how CAS 413 is supposed to operate, so that contractors have a better chance of complying with its requirements.  We’re talking about her decision in DIRECTV Group, Inc. v. The United States (Fed. Cl. 04-1414C, Oct. 14, 2009), in which, as part of a divestiture, the seller (DIRECTV, formerly Hughes Electronics Company, formerly Hughes Aircraft Company) transferred to the buyers (Raytheon Company and The Boeing Company) more pension assets than pension liabilities.  The question before Judge Firestone was how to calculate the benefit that the U.S. Government received in such circumstances, and whether that benefit could be used by the seller (DIRECTV) to offset monies it would otherwise owe the Government by operation of the CAS requirements, as well as the Allowable Cost and Payment contract clause (52.216-7), and the Credits Cost Principle (31.201-5).

 

In a previous case—General Electric Co. v. United States, 84 Fed. Cl. 129 (2008) (aka “GE II”)—Judge Firestone ruled that—

 

… the government must consider the surplus pension assets that GE transferred to the buyer when settling up GE’s CAS 413 payment obligation to the government. … [W]here the government was aware of the transfer of the pension asset surplus and approved the transaction through an advance agreement or novation agreement, the seller may count the value of the surplus pension assets it transferred to the buyer toward meeting its CAS 413 segment closing payment obligation to the government. … [S]atisfaction of the [seller’s] CAS 413 segment closing adjustment obligation may be achieved through the cost reductions the government will receive from its contracts with the buyer.

 

In the current DIRECTV case, DIRECTV divested two segments:  in December 1997 it sold its Defense business to Raytheon, and in October 2000 it sold its satellite business to Boeing.  At the time of the sales, DIRECTV had a pension surplus (as measured by the fair market value of pension plan assets exceeding projected actuarial pension liabilities at the time of the segment closing, i.e., the date of the sale).  In connection with the Raytheon transaction, DirectTV transferred nearly $2.5 billion more in pension assets than pension liabilities; while in the Boeing transaction, it transferred nearly $807 million of “surplus pension assets”.  Using the Teledyne and GE II methodologies together, the litigating parties stipulated that the amount DIRECTV owed the Government at the time of the sales was (in aggregate) $273.4 million—a value far less than the surplus pension assets it had transferred to the two buyers.

 

The Government argued that the Court’s previous holding in GE II was in error, and thus summary judgment in the DIRECTV case was not appropriate.  The Government conceded, however, that “[i]f the GE[ II] case is the law of this case, then we do not dispute that the cost reduction to the Government was [more] than DIRECTV’s CAS 413 segment closing obligation to the Government under the GE[ II] decision, and the Court need not spend its time resolving the extent, if any, by which DIRECTV’s calculation overstates the cost reduction to the Government resulting from the transferred surplus.”

 

Judge Firestone also summarized the other prong of the Government’s argument as follows: “if the government does not expressly agree to accept a cost reduction from the buyer in satisfaction of the seller’s CAS 413 payment obligation, then it is entitled to receive both (1) cash from the seller and (2) a cost reduction from the buyer that equals or exceeds that same amount. The choice, the government contends, belongs to the government.” Unsurprisingly, DirectTV’s counsel argued that the Government’s arguments were without merit and, in particular, that the Government was not entitled to a “double payment” by operation of the Credits Cost Principle.

 

(We note that the parties consistently describe the Cost Principle as a “clause”—which it is not.  In one of Judge Firestone’s rare errors, she writes “... the Allowable Cost and Payment Clause is implemented through the Credits clause …” which is exactly the converse of the actual situation, which is that the Allowable Cost and Payment Clause invokes the FAR Part 31.2 Cost Principles, which include, inter alia, the Credits Cost Principle.)

 

Judge Firestone was not persuaded by the Government’s arguments. In her decision, Judge Firestone wrote:

 

[t]he court agrees with DIRECTV that the government’s reading of the Credits clause is too narrow and that the Credits clause does not require double payment where the evidence establishes that the seller’s segment closing payment obligation was satisfied by the cost reduction the government received under its contracts with the buyer due to the pension asset surplus transferred by the segment seller. The court also finds that none of the other FAR provisions cited by the government require the court to reconsider the GE II decision.

 

In addition, Judge Firestone held that “The government has conceded in this case that it has received more in pension cost savings from Raytheon and Boeing because of the transfer of a pension asset surplus from DIRECTV than DIRECTV would owe the government under any proper CAS 413 calculation. ...  As such, the government has acknowledged that it would receive a windfall if it were to collect cash from DIRECTV after it has received cost reductions from Boeing and Raytheon.  The CAS authorizing legislation does not allow this result.”

 

Finally, Judge Firestone addressed the Government’s argument that DIRECTV must have received express permission from the Government in order to reap the benefit of the pension surplus transfer.  She held that—

 

The court agrees with DIRECTV that in this case, where the undisputed evidence demonstrates that the government received the value of DIRECTV’s CAS 413 segment closing obligation through a cost reduction from the successor contractors, the existence of a government agreement in which the government protected its interest in the pension asset surplus through a novation agreement or other means is not material.  The government concedes that under any CAS 413 calculation, it has received cost reductions that exceed DIRECTV’s CAS 413 payment obligation to the government. The government is not entitled to an additional “cash” payment of an equal amount. DIRECTV has satisfied its CAS 413 payment obligation to the government and is entitled to summary judgment.

 

So the “state of the art” of understanding the operation of the CAS 413 segment-closing pension adjustment is advanced a bit more.  It is perhaps a small victory in the eyes of some, but in the world of government contract cost accounting, it’s a hardfought and meaningful step forward. Unless, of course, it is subsequently reversed by the Court of Appeals, Federal Circuit. See the entire decision here.